Portfolio

Saturday, May 21, 2016

The Long Haul Weekly Review

The markets had a lot of fun this week. Much of it due to the Fed releasing their April meeting minutes. However there were also a lot of economic reports released this week.

Housing starts came in stronger than the previous month which is a good sign as spring is in full gear. What's crazy to see is how low the number actually is from a historical perspective. From the chart we can see the large volatility in the numbers. I always found it noteworthy the housing craze during the 2000's never saw a break past historical highs. Stronger housing starts are good for the economy as it entails plenty of labor and materials. With the Fed raising rates I'd like to see how strong this trend can continue. With shale oil fields no longer providing growth the economy will need other sectors to contribute.
Industrial production took a step up to 104.14 from a March reading of 103.46. This is in line with the ISM manufacturing index from a few weeks ago. A lot of this is in reaction to the somewhat weaker dollar. I'm not expecting the number to stay strong now that the dollar appears to be rebounding a bit. As long as growth can remain intact, albeit weaker than normal, I think we'll be OK. It will put the pressure on industrial companies to lower costs(think layoffs and more automation).

Then we received CPI coming in at 0.4% and core CPI at 0.2%. Let me get this off my chest but Core CPI is kind of worthless in my opinion. The number was strong compared to recent months, but I think a lot of that is attributable to oils strong rally this spring. Either way a lot of people seemed to confuse this number as a reason why the Fed is more likely to increase interest rates this June. That's a partial reason, but according to the Fed minutes CPI is still running below their expectations.

This all brings us to the Fed minutes where a June rate hike is really on the table.

"Most participants judged that if incoming data were consistent with economic growth picking up in the second quarter, labor market conditions continuing to strengthen, and inflation marking progress toward the Committee's 2.0% objective, then it would likely be appropriate for the Committee to increase the target range for the federal funds rate in June."

Based off that sentence alone it was enough to get people all worked up. There was thrashing, blaming, I told you so's, buying, selling and much more in reaction. What no one really mentioned is that the Fed has really been saying a lot of different things lately. In December we were to expect 4 rate hikes this year. Then they blamed foreign economies to say that wasn't happening. Then foreign economies were no longer a concern. Then all the sudden data dependency didn't matter and expectations for things to improve were sufficient.

I can Monday morning quarterback all I want, but the Fed has a really tough job right now. I wouldn't take Janet Yellen's position even if I were qualified for it. But there is a lot going on under the hood that probably isn't even mentioned. The Fed will need to gradually raise rates, and they even said that in the minutes this time. There is a lot of money riding on their every decision, and not just for Wall Street. Main street has a big stake too in the form of pensions, insurance, as does government, and foreign countries.

This all led us to a wild week where the S&P started around 2050. Then hit 2070 only to fall 45 points to 2025. Finally it ended up right about where it started. What wasn't mentioned by many folks is how the market actually finished the week higher ever so slightly. But I thought the prospect of higher interest rates were bad for stocks? I think we'll find out who is right.

Index

Started Week

Ended Week

Change

% Change

YTD %

DJIA

17539.77

17500.46

-39.31

-0.2

0.4

Nasdaq

4718.89

4769.56

50.67

1.1

-4.7

S&P 500

2047.10

2052.23

5.13

0.3

0.4

Russell 2000

1102.30

1112.06

9.76

0.9

-2.1

So now let's get to some portfolio news.

The big news this week was the newest addition to the portfolio Praxair(PX). Praxair is North America's largest industrial gas company. It's also been around since 1907 which means it knows a thing or two about the long haul. I stated in the buy post I'm not particularly keen with the technical's right now. If I was more patient maybe I could get a better price in June or July. That remains to be seen. What I am keen on is the awesome money making machine this company possess'. This year will be a little rough as the company faces currency headwinds like a lot of other large multi-nationals. That's fine with me because even if it takes a few years for the currency situation to turn I'll be given years of opportunity to get shares at a decent price. All the while getting yearly dividend increases.

Also this week Church & Dwight was the focus of some takeover rumors. Well the rumors ended up being false, and the stock after gapping up came crashing down to earth. Maybe this will be the trip back down that allows me to get shares under $90 again. Either way this is a solid company. Just thinking about them makes me want to buy Arm & Hammer baking soda. It does wonders to my weekend pancakes.

Also on a smaller note IBM announced plans to layoff 14,000 workers. Don't be to alarmed though. The company actually stated they still had 20,000 other positions they were trying to fill. It's likely most of the cuts will come from areas that sought better efficiency, and cuts from parts of the company where sale declines will be the norm. Just part of business here and nothing that strikes me as an indicator of things heading south.

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